4 minute read 30 Mar 2021
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How boards can prepare for short-selling attacks

Ramesh Moosa
By Ramesh Moosa

EY Asean and Singapore Forensic & Integrity Services Leader

Forensic and cyber professional. Leads highly talented teams serving multinational organizations. Agile and adaptable in any environment. Aspiring chef. Bike and car enthusiast.

4 minute read 30 Mar 2021
Related topics Board governance and oversight Assurance Forensics
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Boards must be alert and ready to respond as greater uncertainty from the COVID-19 crisis increases opportunities for short-selling attacks.

In brief
  • Greater uncertainty from the COVID-19 crisis has increased the risk of short-selling attacks against listed companies.
  • Such attacks can significantly impact the organization’s financial position and reputation, or even threaten its survival.
  • Listed companies must be able to quickly identify short-selling attacks and proactively develop appropriate strategies against them.

With the COVID-19 pandemic dampening economic growth and global sentiment and disrupting markets, opportunities to profit from betting against organizations have increased. This is evident from the recent rise in short-selling attacks. 

Boards of listed companies need to consider the potential threat of a short-selling attack and know how to deal with it. Such an attack can significantly impact an organization’s financial position and cause considerable reputational damage. 

Not all short selling constitutes an attack. Most short-selling activity involves traders applying strategies to preempt market movements — usually through in-depth research — and profiting from a drop in the organization’s share price. A short-selling attack is different from traditional short selling in that it is deliberate, coordinated and intended to cause disruption.

What a short-selling attack looks like 

In an attack scenario, the short seller usually takes a sizable short position in a targeted organization, then attempts to drive the share price down by releasing unfavorable information about that organization. When the share price falls as a result, the short seller profits. Given their financial motivation and the potential financial gains, short sellers may be selective by using information that is skewed or misleading.   

Short-selling attacks are more common in bear markets where a short seller will make the most money. Given the current global economic environment with volatile markets, an increase in short-selling attacks may not be surprising. Social and digital media exacerbate the impact by enabling bad news to travel faster and further than before.  

The board and management should look out for several indicators of a short-selling attack:

  • A rapidly increasing short position in the organization (typically movements in excess of 10% of the overall shares)
  • An increase in whistle-blower reports or allegations regarding financial reporting matters
  • Increased requests from regulators for further information (in combination with the other indicators listed here)
  • A significant increase in shareholder, customer or employee activism
  • Direct or industry competitors experiencing short-selling attacks
  • An abrupt or unexplained departure of the CFO or other C-suite executives

How to prepare for a possible short-selling attack

As legal challenges, jurisdictional complexities and high costs often make it difficult for organizations to have recourse against short sellers, being prepared in advance of a short-selling attack is crucial.

The board and management need to proactively strategize how to best defend the organization against such attacks and take practical steps. These include assessing industry trends, financial intelligence and potential risk areas, as well as monitoring market sentiment of the organization continually.

It is also important to pay attention to the abovementioned short-selling attack indicators and how these change over time. The organization should then develop pre- and post-attack strategies based on industry trends and in response to changes in these indicators to deal with such incidents. This should focus on identified risk areas, similar to preparation for a potential cyberattack.

The organization should also consider engaging the right team of external advisors and involving it early in the process of developing these strategies. This includes bringing in a third party to provide an independent assessment of key risk areas or advise on the preparation and coordination of responses.

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What success looks like

Success against a short-selling attack could take various forms and depends on the nature of engagement with the short seller. For example, the company’s share price may return to pre-attack levels, reflecting the market’s confidence in the organization’s communications or favorable reports. Or there may be no further engagements with the short seller after the initial report and response (short sellers typically issue multiple reports on a company in their campaign). Another successful outcome could be an independent forensic investigation that exonerates the company from key allegations of fraud and the company takes the opportunity to improve transparency in its financial reporting and disclosure practices. While uncommon in the Asia-Pacific region, legal action against misleading and deceptive conduct may also be taken against the short seller.

The success stories of companies in dealing with short-selling attacks should hopefully provide the board and management with greater confidence in devising a robust approach to handling short-selling attacks. The value in being vigilant and ready to respond to potential short seller allegations and misstatements cannot be overstated. How listed companies prepare for potential short-selling attacks could mean the difference between survival and collapse of the organization.

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How listed companies prepare for potential short-selling attacks could mean the difference between survival and collapse of the organization.
Ramesh Moosa
EY Asean and Singapore Forensic & Integrity Services Leader

Boards should consider the following questions:

  • Is the board tracking market risks and the potential impact on the organization’s share price?
  • Is the board monitoring short positions for the company and does it know the underlying reasons for these?
  • How does the board monitor questions from shareholders and analysts? Are the responses reviewed by the board?
  • Are there any management decisions that could be construed as contrary to shareholders’ interests?
  • Does the board have a plan in place for a potential short-selling attack?

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Summary

The current global economic environment has heightened the risk of short-selling attacks against listed companies. The board and management therefore need to look out for indicators of such attacks and proactively develop appropriate strategies beforehand. They should also recognize signs of success against short-selling attacks.

About this article

Ramesh Moosa
By Ramesh Moosa

EY Asean and Singapore Forensic & Integrity Services Leader

Forensic and cyber professional. Leads highly talented teams serving multinational organizations. Agile and adaptable in any environment. Aspiring chef. Bike and car enthusiast.

Related topics Board governance and oversight Assurance Forensics
Upvote